Stratasys Ltd. (SSYS) Q1 2020 Earnings Report, Transcript and Summary

Greetings. And welcome to Stratasys First Quarter 2020 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please stand by. The conference will begin momentarily. I would now like to turn the conference over to your host, Yonah Lloyd, Vice President of Investor Relations.

Thank you, Brock. Good morning, everyone, and thank you for joining us to discuss our 2020 first quarter financial results. On the call with us today are our CEO, Yoav Zeif, and our CFO, Lilach Payorski. I remind you that access to today's call including the prepared slide presentation is available online at the Web address provided in our press release. In addition, a replay of today's call including access to the slide presentation will also be available and can be accessed through the Investor Relations section of our website. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements including, without limitation, those regarding our expectations as to our future revenue, gross margin, operating expenses, taxes, and other future financial performance and our expectations for our business outlook. All statements that speak to future performance, events, expectations or results are forward-looking statements. Actual results or trends could differ materially from our forecast. For risks that could cause actual results to be materially different from those set forth in forward-looking statements, please refer to the risk factors discussed or referenced in, A, Stratasys’s annual report on Form 20-F for the 2019 year as well as in, B, our reports on Form 6-K that we are furnishing to the SEC today including the related press release concerning our earnings for the first quarter of 2020 and our operating and financial review and prospects which are attached as exhibits to those reports on Form 6-K. Stratasys assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. As in previous quarters, today's call will include GAAP and non-GAAP financial measures. Non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance. Certain non-GAAP to GAAP reconciliations are provided in the table contained in our slide presentation and in today's press release. Now, I would like to turn the call over to our CEO, Yoav Zeif. Yoav?

Thank you, Yonah. Good morning, everyone, and thank you for joining today’s call. So, first and foremost, I hope that you and your families are healthy and safe. We are all experiencing an unprecedented global pandemic. Our thoughts go out to those that have been impacted. I would like to extend our deepest gratitude to the many heroes that are working hard to keep people safe during this difficult time. As many of you have learned, 3D printing is playing an important, even critical role during this crisis, helping the medical community maintain a steady supply of personal protective equipment, testing swabs, and more. I could not be prouder of the Stratasys team and how we have responded to the situation. Our top priority is the well-being of our most valuable assets; our employees worldwide. We began an ongoing communications channel here as soon as the news began trickling out. As early as February 3, we sent a company-wide email regarding travel restrictions and have tried to be ahead of the curve whenever possible. We implemented work-from-home options early, ensured that all IT needs would be met for remote activity and set up an Intranet for real-time updates and FAQs. Stratasys operated as an essential business in all key US locations. Our regional HR teams have been providing round-the-clock support, and we have increased the frequency of our management updates across all corporate and regional teams, with a weekly review of practices and procedures to meet the current specific challenges. I want to recognize the efforts of the entire Stratasys family. Those who have made a swift and effective adjustment to working remotely to support our business as well as those who continued coming into the offices, the labs, and production facilities, working under social distancing and safety conditions to keep our production plants open and our products shipping. Our people have demonstrated relentless passion to keep our business strong and active. On behalf of the leadership team, we greatly appreciate your extraordinary resilience at this challenging time. On to the business. We are committed to transparently sharing what we are seeing to the extent possible. The unpredictability of so many factors at play on a global scale has created an atmosphere of uncertainty on many levels. We will lay out the ways we are being both proactive and adapting as needed while staying focused on maintaining our business continuity and coming out of this pandemic stronger and poised for growth. We do believe that the fog is slowly lifting and that as things stabilize, our visibility will improve in the coming months. Let me start by saying that our business is healthy. We believe that we are well prepared to manage the current downturn with a strong balance sheet while focusing on cost control and cash generation. We have over $325 million in cash and equivalents and no debt. Our engagement level with our customers remains high, and the demand for our systems is strong. Unfortunately, due to the COVID-19, our business in Asia was already affected earlier in the quarter, followed by Europe and then the US. As events were unfolding, we recognized how our technology can play a major role to support the health care community, and we responded immediately. I’d like to share some of what we have experienced, including actions we took to help fight the pandemic, the measures we are taking to address the business operationally, and how we see the market playing out. In fact, as we will soon discuss, in some ways we may emerge from this situation in an even better position for the long term than before. With over 30 years of experience leading the 3-D printing industry that we helped found, Stratasys was well-positioned to mobilize what we believe is the largest additive manufacturing network in the world. In order to assist in the fight against COVID-19, we leveraged our application expertise, our channel and partner network and our corporate-wide resources to help get a variety of printed products to the global medical community. Initially, in consultation with customers like Medtronic and Mayo Clinic, we identified a face shield as the first application and fastest way to match what was desperately needed with what could be produced. We built a coalition of over 100 companies including Medtronic, Boeing and Raytheon that agreed to use their Stratasys system and others for this effort. Today, over 100,000 shields and related items have been delivered. We connected most of them via the cloud using our new GrabCAD Shop work management software. Other customers of ours responded as well such as Schlumberger, General Atomics, and Bayer. It has been amazing to watch these multinational OEMs pivot so quickly to meet the need, highlighting a key benefit of 3D printing over conventional methods, the versatility to instantly go from making air ducts or tail lights to PPEs and ventilator tubes. In Paris, APHP, the largest hospital system in Europe, bought, installed and began running 60 of our FDM printers, literally 48 hours from ordering to making their first shield. This provides them with a rapid response system to address multiple protective equipment and medical device needs, as well as better control over their supply of 3D printable products. In the US, we have been hosting the COVENT-19 challenge in our GrabCAD community through the auspices of a team of anesthesiology resident physicians from Massachusetts General Hospital. We have already received over 200 entries from more than 2 dozen countries around the world. The goal is to design a rapidly deployable, low-cost mechanical ventilator and Stratasys application engineers are helping 7 finalist teams develop working prototypes in our lab this month. Additionally, we recently announced an agreement with Origin, a San Francisco additive manufacturing company, to deliver to healthcare providers and testing centers up to 1.3 million testing swabs every week. We have already facilitated orders for a few hundred thousand units. Here in Israel, the government implemented a robotic COVID-19 testing system to conduct up to 3,000 tests per day. Before the program could launch, the systems sustained irreversible damage to its fluid containers, and it would have taken weeks or longer to get the exact precision and replacement parts from the vendor in the Far East. Using our PolyJet technology with biocompatible material, we were able to quickly print these parts so the testing could continue. And, globally, in order to address the unique challenges of providing support at this time for certain printers such as our new J55, our service teams have been enhancing their tools with videos and remote device management systems in order to provide better digital and real-time support for installation and troubleshooting. These are just a few examples of what is truly an incredible display of commitment across a worldwide network of makers led by Stratasys and peer companies throughout the entire additive manufacture industry to combat COVID-19. We have no doubt that all of these efforts are showcasing our industry in a positive light, educating the market, and significantly increasing awareness of the many value proposition of additive. As a reminder, some of those key benefits include greater freedom of design, speed and cost efficiency of product iteration and the flexibility to produce a wide range of products from a single system. Only 3D printing can provide localized production in proximity to the end market through digital inventory, adjust production flow on-the-fly for factory jigs and fixtures and, as demonstrated during this crisis, help alleviate the problem of supply chain crunch. We believe that as a result of the way our industry has stepped up during this time, more and more companies and governments will reassess their supply chains and implement decisions to drive increased demand for 3D printing as a strategic imperative, leading to incremental business opportunities once we emerge from the current situation. The decline in Q1 sales and the softness we are seeing now in Q2 are clearly due to a meaningful portion of our customer base being effectively shut down from a purchasing and consumption perspective. As a reminder, our revenue cadence tends to be back-end loaded with a significant portion of business coming in the final few weeks of the quarter, so the impact on our results was more notable. Furthermore, the unusually low 48.4% margin was not due to special discounts or material ASP reduction. Rather, it is based on the lower proportion of hardware and consumables out of the total revenue mix. We strongly believe that margins will come back to our usual low 50’s percent when the macro environment recovers. Meanwhile, to help mitigate the impact, we begin to implement cost control measures at the end of February and continue to closely manage them. All employees were affectively reduced to a four-day work week last month. We have instituted a nonessential hiring freeze, and we have adjusted our cost base and production plan accordingly. As a reminder, in 2019, we built inventory in both raw materials and finished goods to help us meet demand in a more efficient way and prepare for our new product launches. While it reduces our operational cash generation last year, it’s proved to be an even wiser move than anticipated, as we have more finished goods now that are located in the respective regions. While we are facing some minimal supply issues for our new products, we are less exposed for our existing ones. Additionally, our plants are operational, as we continue production to secure our inventory levels to meet demand. And yet, even though the business environment right now is slow, we are encouraged by the discussions we are having and the opportunities that will come once the situation passes. As an example of the high level of interest, two weeks ago, many of you attended our digital launch event featuring the new PolyJet J55, an exciting and highly innovative system that brings most of the features of our premium PolyJet technology right into the office in a quiet yet powerful, new and patented turntable format. Thousands of people attended the event including many Fortune 500 companies, a strong indication of interest. Our new product development plans are continuing, and to-date, we have not reduced our spending for this program. We had originally planned to launch new products in the back half of this year, primarily in Q4. Due to the current situation, it is clear that the return on investment of marketing, trade shows, travel and other expenses needed to launch will be severely limited in a tempered spending environment. In order to maximize the impact and to avoid any potential supply chain issues, we believe it makes much more sense to wait until the first half of 2021. We are excited about these additions to our product and technology portfolio and look forward to sharing more at the appropriate time. I would like to now hand the call over to our CFO, Lilach Payorski, who will review the details of our financial results. Lilach?

Thank you, Yoav, and good morning, everyone. Total revenue in the first quarter was $132.9 million compared to $155.3 million for the same period last year. On a constant currency basis, total revenue declined 13.9%. GAAP operating loss for the quarter was $19.9 million compared to an operating loss of $3.3 million for the same period last year. Non-GAAP operating loss for the quarter was 8.4 million compared to operating income of $6.8 million for the same period last year. GAAP net loss for the quarter was $21.7 million or $0.40 per diluted share compared to a net loss of $2.3 million or $0.04 per diluted share for the same period last year. Non-GAAP net loss for the quarter was $10.6 million or $0.19 per diluted share compared to non-GAAP net income of $5.7 million or $0.10 per diluted share reported for the same period last year. Product revenue in the first quarter was $83.2 million, a decrease of 20.9% compared to the same period last year or 20.3% on a constant currency basis. Within product revenue, system revenue decreased 39.5% compared to the same period last year and decreased 39.2% on a constant currency basis. Consumables revenue decreased by 5.8% compared to the same period last year and decreased 5.1% on a constant currency basis. Services revenue was $49.7 million, a decrease of 0.9% compared to the same period last year and decreased 0.6% on a constant currency basis. Within services revenue, customer support revenue increased by 2.2% compared to the same period last year, and increased 2.9% on a constant currency basis. GAAP gross margin was 45% for the quarter compared to 49.2% for the same period last year. Non-GAAP gross margin was 48.4% for the quarter compared to 52% for the same period last year. The decline in gross margin is due primarily to the lower proportion of hardware and consumables out of the total revenue mix. We are confident that our gross margin will return to their usual range once the situation passes. GAAP operating expenses was $79.8 million, relatively flat compared to the same period last year. Non-GAAP operating expenses decreased by 1.6% to $72.7 million for the quarter as compared to the same period last year, driven by cost-cutting measures in SG&A. Please note that R&D spending this quarter was higher than Q1 of last year as we remain committed to our long-term strategy and we continue to invest in developing new products that we believe will meaningfully expand our addressable markets. The company generated $11.3 million of cash from operations during the first quarter as compared to $4.6 million of cash generated in the same quarter last year. We ended the quarter with $325.5 million in cash and cash equivalents and short-term deposit compared to $321.8 million at the end of the fourth quarter of 2019. We believe that we are well prepared to manage the COVID-19 situation with a strong balance sheet and no debt while focusing on cost control and cash generation. The company is withdrawing its 2020 financial guidance for revenue, GAAP and non-GAAP net income and EPS, non-GAAP operating margin, and capital expenditure due to the high level of economic uncertainty and disruption caused by COVID-19. Appropriate reconciliation between GAAP and non-GAAP financial measures are provided in the table at the end of our press release and slide presentation with itemized detail concerning the non-GAAP financial measures. I would like to turn the call back to Yoav for closing remarks. Yoav?

Thank you, Lilach. Our communication with the channels and key customers remains highly active, and we have continued to do business during this time. But with the US and other markets still effectively closed, we have little indication regarding the pace of recovery. Therefore, we believe that there is too much uncertainty at this point to provide a reasonable estimate of the full-year financial impact related to COVID-19. Directionally speaking, we expect that many, if not most of our customers will continue to keep their spending to a minimum in Q2. And given that there will be a full quarter’s worth of COVID-19 impact, we currently expect a sequential revenue decline of 5% to 10%. As for how things look as we emerge and begin to recover, It's clear that this crisis has helped generate significant awareness that 3D printing is becoming essential for accelerating and improving design, speeding up time to market and production, and creating less dependent and more resilient global supply chains, including localized digital inventory and distributed manufacturing. We have heard firsthand from our customers that executives are asking their engineering teams more questions about what 3D printing can do for them. This is important because optimizing value from additive manufacturing is a strategic exercise, and Stratasys is particularly suited to play the role of strategic additive partner for our customers. If economic recovery begins to kick in during H2, we would expect to see a gradual improvement and we could see a return to sequential growth in the back half of the year. Additionally, we believe that we will be able to capitalize on the improved perspective of many businesses and governments who, because of this crisis, are recognizing the weak link in their current production flow that we proved can be addressed by incorporating additive manufacturing. Meanwhile, we are being proactive in managing our performance during this challenging time. We built inventory to improve efficiencies and limit disruptions. We have reprioritized spending to ensure adequate resources to address both COVID-19-related items and those critical for strategic growth. And we continue to monitor the industry for opportunities. Our agile, high-performing team is helping us persevere through it and is simultaneously preparing to seize upon opportunities to support an exciting growth period as we all recover from the current situation. The start of my first 100 days as CEO, I have been directing a deep-dive diagnostic and strategic review of the company. Later in the year, I plan to share a more extensive view of how Stratasys will look as we lead our industry forward with strong and sustainable growth for many years to come.

All right, operator, please turn the call over for questions.

At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question today is from Greg Palm of Craig-Hallum Capital Group. Please proceed with your question.

Yeah. Thanks for taking the questions. I guess I first wanted to clarify one of the statements from the prepared. So, if I heard right in assuming a gradual macro recovery that sequential growth could return in the second half, does that mean second half over first half or is that a Q3 comment? And I guess is your expectation right now that Q3 could follow normal seasonality trends and be down sequentially again from Q2? Just wanted to clarify that, please.

Yes. Greg, thank you for the question. Yeah. So, our expectation is if everything will go well with the COVID-19 going away in Q3 and Q4 which definitely I think at that point none of us can know for sure, we do expect a growth compared to the first part of the year. And specifically to Q3, we expect this will be higher than Q2.

Got it. Okay. And, I mean, as it relates to the broader macro environment, I'm just curious, what will you be watching or listening to from your customers that might give you more confidence in the recovery and obviously a pickup in demand? I mean, I guess do you have any sense for sort of the capacity and timelines for investments on behalf of your customers at this point?

Hi, Greg. Yoav. Great question. We are in constant interaction with our resellers and partners and they are on the market. We are ready to go. The moment there will be a recovery, we are there. And we wanted -- we waited carefully. We are watching our impact to customers, so the aero, the auto, we see already the auto coming back gradually towards some plants here and there. And we have the inventory in place, the partners in place. Everybody is ready. And we are watching carefully those impact parents. The moment they will be back to work, we can deliver and supply them.

Okay. That's helpful I guess last one, thinking about trends or things that might accelerate as we all emerge from what's going on, it's been amazing to see some of the -- you know additive technology, your technology specifically helped address some of the issues. So that's great to see. But what's your thought on just the accelerated adoption for digital manufacturing? And really curious to see or hear how Stratasys might fit into this longer term.

Greg, this is fantastic. This is the light in this dark period in a sense. We are having constant discussion, as you know, and you are covering this area, challenge is to the status quo of traditional manufacturing, this is the biggest challenge, because we have the technology, we have the machine, we can combine them together with a traditional manufacturing line. But the status quo is holding. And suddenly, in this type of period, when people need this container for the robot, or the face shields, and you can do it in less than 24 hours, you just get the file and you don’t need inventory, you just need an inventory of files, we see more and more discussion around this. And we believe it will be part of the government long term plan.

The next question is from Troy Jensen of Piper Sandler. Please proceed with your question.

All right. Thanks for taking my questions, and also thanks for all your efforts with the COVID. First off, for Yoav, could you talk -- remind us of vertical exposure? I guess I’m curious to know what your guys’ in-customer exposure is with respect to auto versus aero, dental, elective health care, and what not.

Hey, Troy. We are the leader in taking 3D to manufacturing. And, of course, when our customers are shutting down, so we’re being impacted and mainly the aero and auto and some of the -- dental leading -- some the dental-leading customers and, of course, education which is one of our main verticals, and not only main verticals but also a main spender in Q2. So, those are the main ones they see now. The moment they are back, we are there.

Yes. Okay. Understood. How about for Lilach? Can you just talk a little bit more on the cost controls? I’m just being curious, on an absolute basis, I think you guys spent about $72.5 million in the March quarter. I'm assuming that's going to go down sequentially. Could you kind of quantify by how much you think we could see sequential changes in the OpEx on a dollar basis?

Yeah. Good morning, Troy. Yeah. So, cost control, we did implement several cost controls already starting in end of February as we see the situation start coming. But it will be more notable as we get into the second quarter, then we will see a much more significant impact. Our ability to impact cost control in Q1 were a little bit limited in terms of the time frame. We definitely significantly -- implemented significant measures. First of all, all the travels around the world, so we will see some cost control around that. Working from home, so it also impacts our overall maintenance goals. Nonessential hiring freeze, effectively 20% salary reduction for all of our employees and executives, and we are still with this provision probably for almost the entire second quarter. So this will be a significant impact also on our spending level. We held back merit and raises for the year, and we adjust our cost base and production plan. So we definitely look all over whenever we can to address any variable spending as well as some fixed cost spending in order to address the situation. Significantly focus also on operational, make sure to minimize the operational inefficiency whenever we can.

The next question is from Shannon Cross of Cross Research. Please proceed with your question.

Thank you very much for taking my question. I wanted to understand a little bit more on the push-out of product launches. I get the wisdom of doing a given trade shows and costs on that, but I'm curious. Were there any delays you were seeing in the actual development or R&D cycles? Or was this purely just because of the current environment? And then I have a follow-up. Thank you.

Hi, Shannon. So, first and most importantly, we have not reduced R&D spending to-date. For us, the NPI is like this is our growth engine going forward, and we want to maximize it. This is the bottom line. The J55 that we launched already, we made all the spending and then we launched it and created a great buzz. But looking forward to the new products, we originally planned to launch them in H2 primarily in Q4, end of year, and to create kind of end-of-year momentum. When we look currently on the business, it doesn’t make sense. When you put the number to pen to paper, it doesn't make sense because those are significant new products, new lines, and we want to create momentum. And we don't believe that this is the right way to go. In terms of, I would say, the timeline, we are more or less the same time around Q4. But we believe that pushing them forward, more or less in the same period like the COVID-19 impact, few months, several months, will create a much better impact and return to investment to our marketing push, but also the whole company, gearing the whole company to a new momentum next year.

Thank you. And then, I'm curious about working capital as we go through the year. Clearly, accounts receivables was a source of cash. I assume we will see the same thing from inventory. So, how should we think about working capital as you look out through the year as you're managing your overall cash flow and cash balance? Thank you.

Good morning, Shannon. So, first of all, I think that we are well positioned to overcome this crisis in a couple of, say, next few months given our cash balance, high cash balance, $325 million, and no debt. So, we feel comfortable about going through this crisis for sure. This quarter, we actually generated $11.3 million cash which definitely help us as well. We do look careful on CapEx management and CapEx expenditure, but we will need to continue invest in our facility. We have some commitments on our facility that we need to continue these for the coming few months. If we are specifically looking at Q2 and probably going to be also Q3, we will have a negative cash flow position given that our low revenue level in Q1 and probably low revenue level in Q2 will reduce significantly our ability to collect and basically balance to collect. So, we all focus on that. But at the same time, we are focusing on reducing expenses as much as we can. We are also managing well our inventory, make sure that we have the adequate inventory level, not increasing our inventory level more than what we need, make sure that we are not taking too much commitment from raw materials in this aspect. We do see some challenges on our accounts receivable, given that customers are effectively shutting down and it’s more how to collect, specifically now at the end of March and now in April. But we also focus on collection and helping our custom -- also helping our customers to go through these challenges. But all in all, like I mentioned, Q2 and Q3 are probably going to be a negative operating cash flow with the hope to come back to business as we from this situation.

The next question is from Wamsi Mohan of Bank of America, Merrill Lynch. Please proceed with your question.

Yes. Thank you. Good morning. Lilach, can you just talk a little bit about how much of the revenue comes from SMB type customers versus larger customers? I think you mentioned just now that there were some issues around receivables. I was wondering if you can be a little more specific around what customers are asking -- are they asking for extensions that you're helping out with or what percentage of the receivables portfolio are you currently worried about? And I have a follow up.

Yeah. Thank you. We do not provide breakdown of our customer between small business customers and large ones. But we’re definitely dominated by a lot of large ones, Fortune 500 customers, so we are well-positioned in that aspect. And we also have a relatively very good coverage from AR insurance. So, we are not too worried about that. But at the same time, we do see some challenges. Sometimes maybe more from some of our resellers because obviously they are dependent on their customers, but we have -- we work very close with them, and we believe that we'll be able to overcome those challenges in the next couple of months.

Okay. Thank you. And I appreciate all the efforts that you’ve alluded to around the cost side that you guys are taking action some of this quite proactively. When you look at the OpEx object's leverage in the quarter though, and I realized that you had more revenue impact in the quarter and you didn't have as much time to respond yet in Q1, if you look at Q2, though, where Q2, I mean, if it’s down 5% to 10% sequentially in revenues, likely will see some growth margin continue to deleverage. You also alluded to sort of negative cash flows. So is Q2 like -- what's the magnitude of cost takeout that you think is reasonable? Are you going to still be a multiple of the revenue decline in terms of the deleveraging from quarter-on-quarter? It feels like OpEx should go down much more materially in Q2, but just trying to get some idea of sizing especially because you're continuing down the R&D investments. Thank you.

Yeah, it’s a good question. So, first, I want to address the gross margin. Given the fact that next quarter we're going to see probably a decline of 5% -- 10% as compared to Q1 and, as mentioned also on the script, we were probably going to see a full impact of COVID-19 during Q2 which mainly dominated by the reduction -- most notable reduction in consumables, I would expect that overall hardware and consumables revenue stream proportion out of the overall revenue will impact also the gross margin and maybe going to impact even deeper the gross margin than what we see now. Okay. So this is from a gross margin perspective. And we’re also going to be impacted probably in some extent from operation and efficiency because we do have some fixed costs. And our ability to address those in a very short period of time is more limited, although we are very much focused on addressing that. So, gross margin next quarter, probably going to be even lower than the rate that we saw now. Now, having said that, we all focus, like I mentioned before, on significant cost-cutting measures across the company in the gross margin level as well as in the OpEx spending, and the most notable one is really reducing all the organization to 80% work level, the hiring freeze, no merit, a significant reduction in non-NPI activity. So we all focus that with our ability to overcome the shortfall of the revenue, and the shortfall in the gross margin due to the effects that I just mentioned probably not -- will not be able to overcome the entire decline. So it's important to understand that.

The next question is from Brian Drab of William Blair. Please proceed with your question.

Hi. Thanks for taking my questions. So, this question about OpEx has been asked twice now, and I'm going to ask it a third time because I still -- I’m just having trouble figuring out what to put in the model for this second quarter. I don't know -- if you’ve had OpEx or SG&A of $48.5 million adjusted in the first quarter, and, I mean, can that go down $5 million? I'm really hoping that we can get more help in terms of quantifying. I think we've really laid out very clearly that directionally, it's going down and you have a nice slide explaining that. But I don't know if I should model $47.5 million or if I should model $42 million still.

Yeah. Brian, hi. Good morning.

Good morning.

Yes. I do believe that, again, based on all our cost-cutting measure, we can influence the OpEx next quarter significantly if you think about that like maybe 50% or 60% or even more of our spending is relatively related to payroll and we are going down to 80%. It will be significant, okay? We are not getting now in specific numbers, okay, but it can be significant impact in Q2.

So, everyone, even salaried employees like engineers and executives, are taking a 20% pay cut. Is that how I'm understanding it? A –Yoav Zeif: Hey. Brian. Yeah, everyone, no exception. Leadership, engineers, sales people, head office, everyone. We are in a challenging time and everybody needs to put his shoulder in to help with the effort.

Next question is from Jim Ricchiuti of Needham & Company. Please proceed with your question.

Hi. Thanks for the additional commentary on gross margins. I'm wondering in Q2 if we see some of the disruption lifting from the customer base, why potentially you wouldn't see perhaps a better utilization of equipment in the field and maybe that helps your consumables business a bit or do you just see that this low utilization continuing to impact heavily on gross margins in Q2. And then I also had a follow-up just as it relates to the overall product gross margins. You say -- you indicate that it’s -- it hasn’t necessarily been a function of discounting. But how much has mix played into your hardware gross margins? Thank you.

Jim, thanks for the questions. So, the first question about consumables in Q2 and we’ll get into it afterwards, yes.

Yes. Yes. So we -- like I mentioned before, we expect a deeper decline in Q2 for consumables than Q1 given a full quarter of impact. And it’s mainly significantly given the reduction in utilization. So, effectively, customers are shutting down, okay, and they closed their premises, they closed their production facility, closed their R&D center and everything in education. All machines are down. And so we do see a significant reduction in utilization. Will that impact the entire quarter? Probably. It really depends when the COVID-19 will come back. And we -- customers are less willing to take more stocking of consumables given the uncertainty of coming back and due to a short shelf life of some of our consumable products. Please remember that we have a large installed base. So the main impact of the reduction in consumables is because of utilization, not because of consumables that attached to hardware sales. Obviously when we have lower hardware sales, so we have lower consumables. But the main impact is really the fact that our install base is basically shutting down effectively. Now specifically about the gross margin, the impact of having hardware and consumables together proportionately out of the total revenue is that it’s now -- this quarter, it’s about 63% out of the total revenue. And if you look, that maybe even eight quarters back, it was more than 65%, 67%, 68% or even 70% out of the total revenue. If you do that math, you can see that the dominated effect to our gross margin is really the decline in those streams. And this is what we expect to see in Q2 as well.

Okay. And then a follow-up question, is there any potential red-through that you can get from looking at the business geographically? And I recognize Asia is a smaller part of your business, but is there any sense as to how that region has started to come back and potentially even some parts of Europe? Is there any read-through that gives you some indication of how we might see the business start to recover as some of the disruption and temporary shutdowns are lifted?

Sir, please standby. The operator will be establishing the connection to the speaker again. One moment, please.

Okay. We should be back on the line. Jim, you still -- you hearing us?

I hear you fine. I don’t know if you heard my follow-up question which just relates to...

Yeah. Can you repeat it, please? Thanks.

Certainly. I’m just wondering geographically if there’s any read-through that you have and, again, recognizing Asia is a smaller part of your business, but as we've seen parts of Asia start to come back with shutdowns being lifted and even potentially some parts of Europe, is there any read-through that you see that could give some indication as to how the business in North America could begin to change as these shutdowns are lifted?

So, it’s Yoav. Hi. So, we see some recovery, but very moderate one. Mainly, we see some orders that were held by the customers in Q1 and they're starting to accept deliveries; by the way, also in the US. So, some significant purchase orders that we had at the end of March that were stopped like overnight, we see them coming back and we deliver them now. But it's gradual and it's on/off. So, even in Korea, when we saw some improvement and there is another kind of a break, you see some hold -- are holding some orders. In China, we see some recovery, but we still have to improve our position there. So, we see some, some light, but it's still moderate. And as I said also in the US, we see some significant orders being taken by those customers that came back to work.

The next question is from Ananda Baruah of Loop Capital Markets. Please proceed with your question.

Hi. Appreciate you guys taking the questions. I have a couple, if I could. I jumped on after the call started, so I apologize if I ask something that was stated in the prepared remarks. Do you -- could you talk to or have you talked to what the month of March and the month of April year-over-year run rates where for both the hardware and the consumables business? And if you haven’t, could you give us some sense of what that might have looked like? And then I have a follow-up. Thanks.

Hi, Ananda.

Hi.

We do not provide -- hi. Good morning to you. We do not provide the specific information regarding on a monthly basis. But we do know to say that, typically, our revenues are more back-ended loaded. So, definitely, this is why we're more impacted by COVID-19 in Q1. And in Q2, we’re probably going to see the full impact of COVID-19 as companies are actually shutting down and closed their premises and the machines are closed and the consumables going to be down. But specifically about April, it's probably like you have mentioned now. We see some good signs coming in North America. We are able to capitalize on some pipeline from Q1 that's actually materialized now in Q2, but it's probably too early in the quarter to provide any indication.

And the last, did you -- I heard it mentioned a couple of times after I jumped on. June quarter sales declines of 5% to 10% sequentially. Is that a guide mark that you guys are providing? Is that sort of an official Stratasys guide mark? I heard that mentioned a couple of times.

Yes. Yes. It’s included in -- also in the scripts. Yes.

There are no additional questions at this time. I would like to turn the call back to Yoav Zeif for closing remarks.

So, thank you. Thank you for joining us. Stay safe and healthy. Looking forward to updating you again next quarter. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.